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BLOOMBERG BUSINESSWEEK: Is Wall Street Pay Hampering U.S. Innovation?

February 26, 2014
By Sheelah Kolhatkar

In 2009, when the economy was still convulsing from the financial crisis, Daniel Roth (now Linkedin’s (LNKD) executive editor) published a piece about the future of Wall Street suggesting that the financial industry’s temporary paralysis might be a good thing. “No one likes to see an industry die, but there is an upside,” he wrote in what seemed like a prescient article in Wired magazine that June. “Often, smart cubicle refugees will seize the opportunity to pursue their entrepreneurial dreams, unleashing waves of innovation upon society.” He cited the decline of the Hollywood studio system and the birth of independent film as an example of how one big industry’s collapse might prompt a flowering of creativity and new enterprise.

The only trouble is, it didn’t happen.

By all accounts, the opposite occurred. The surviving banks became bigger and more powerful than ever, and the paychecks remained enormous, even if the institutions themselves are somewhat leaner. The brain drain into finance and away from academia, corporate America, policymaking, and everything else has slowed, but it continues. Employment levels in financial services overall are lower than they were before the financial crisis, yet approximately 35 percent of the graduating class of Princeton still entered the financial industry last year.

Now Andrew Yang, who founded and runs Venture for America, a fellowship program that places top college graduates in startups for two years, is here with yet another critique of the fact that a disproportionate number of college graduates are squandering their hard-earned educations on Wall Street careers. “A friend told me about a young Princeton graduate she knew named Cole. Cole studied mathematics and went to work for a hedge fund directly out of school. He’s now making well into six figures at the age of 24. That’s his whole story to date,” Yang writes in an excerpt from his book, Smart People Should Build Things. “That’s success and the American way. And yet how excited are you about Cole’s trajectory?”

Yang argues that our idea of achievement has become far too narrow and materialistic. It is hurting the economy by taking math, science, and liberal arts graduates away from fields where they might invent and build and hire people at new companies they found and concentrating them in the financial sector, where they aren’t likely to contribute to future economic growth. He asserts that many of the most highly educated young people are also some of the most risk-averse, overly concerned about predictable career advancement and impressing their parents and friends.

“We need people willing to take risks and, yes, to occasionally fail,” Yang writes, as opposed to having the top third of every graduating class following the same predictable path of investment bank analyst program/business school/hedge fund. “We need people committed over extended periods of time to creating value, no matter how hard that is. We need people who care deeply about the work they’re doing.” Yang’s antitote to Wall Street-itis is Silicon Valley.

Kevin Roose, in his new book Young Money, which charts the early careers of a handful of fresh Wall Street recruits, suggests that finance’s hold over young minds is starting to loosen and that the freshly educated are looking for something more meaningful than simply the opportunity to collect a huge paycheck.

Encouraging them to start technology companies, as Yang does, is one fine alternative, but it isn’t a perfect solution. The reasons why can be seen in the recent announcement by Facebook (FB) that it was buying Whatsapp for $19 billion. A closer look at the eye-popping deal revealed that Facebook was paying $345 million for each employee of the text messaging service—all 55 of them. It made a handful of people amazingly rich almost overnight. But even in the innovation paradise of Silicon Valley, creating companies that build things doesn’t seem to involve creating jobs. That still leaves a lot of young people left to build algorithms for hedge funds.